Expect big boosts in bank dividends after stress test, experts say

Dividends and buybacks will go up after the Federal Reserve's stress tests on Wall Street banks are completed next week, with Bank of America Merrill Lynch and Citi likely to double their dividends, experts said Thursday.

"The payout ratio is going up," Second Curve Capital CEO Tom Brown said in an interview with CNBC's "Closing Bell."

Last year, banks paid out about 68 percent of their earnings in the form of dividends and stock buybacks. Now it is expected to be about 75 percent or more.

"It wouldn't surprise me over the next three years that the industry gets pretty close to 100 percent in terms of dividends and buybacks," he said.

Tim Clayton | Corbis | Getty Images

Payouts aside, analyst Dick Bove, vice president of equity research for Rafferty Capital, thinks the banks have lost their message.

"They no longer have an argument as to why investors should commit funds to the industry, because basically they haven't explained why the industry is a growth entity, and therefore they are dividend stocks," he said.

In fact, Citi and Bank of America Merrill Lynch are selling at a 40 percent discount to book value, yet they are among the most profitable companies in the U.S., he said.

Bove has long been a critic of the stress tests that have been imposed on the industry after the financial crisis.

"These stress tests are bad for banks, bad for the U.S. economy and bad for the U.S. democracy. I can't imagine a worse thing that any industry would be subjected to," he said Thursday.

However, David Ellison, portfolio manager of the Hennessy Large Cap Financial Fund, said the American banking system is the best in the world, partly because of the Federal Reserve's stress tests.

"This is basically a green light to continue to lend and continue to grow the economy through the financial system," he said.